Tuesday, December 10, 2013 - Impossible Until It Is Done

Impossible Until It Is Done

by Sinclair Noe

DOW – 52 = 15,973
SPX – 5 = 1802
NAS – 8 = 4060

10 YR YLD - .06 = 2.79%
OIL + 1.17 = 98.51
GOLD + 21.60 = 1263.00
SILV + .59 = 20.53

Today federal regulators voted to implement the Volcker Rule. It won't actually be implemented until 2015, but the vote was today. The Volker Rule will lay out specific activities that banks can and can't do.

The final rules would prohibit proprietary trading by banking entities. As required by the Dodd-Frank Act, the final rules would include exemptions for: Underwriting - this exemption would require that a bank act as an underwriter for a distribution of securities (including both public and private offerings) and that the trading desk’s underwriting position be related to that distribution. Market making-related activities - a market-making desk may hedge the risks of its market-making activity under this exemption. Risk-mitigating hedging - this exemption would require that hedging activity is identified specifically. Trading in certain government obligations banks could still trade in Treasuries and muni's, and what the heck, foreign sovereign debt or its political subdivisions.

The final Volker Rule would also clarify which activities are not considered proprietary trading, and it is looking like nothing is considered a proprietary trade with the possible exception of when a bank trader places a bet on the Yankees with his local bookie. You may recall that Jamie Dimon tried to claim that the London Whale was not involved in proprietary trading, rather hedging; of course this was after he claimed he didn't know what the London Whale was doing

The final rules would become effective (appropriately) April 1, 2014. The Federal Reserve Board has extended the conformance period until July 21, 2015. Turning the Volker Rule into regulations has been slowed by a lobbying onslaught. And it looks like the banking lobby has won. The banks met with regulators on a regular and constant basis, and basically rewrote the rules. There was a token appearance from bank reformers, but the odds were against them by about 99 to 1.

The Volker Rule won't be totally worthless. Already many banks have shut down or spun off the desks they used for trading that was clearly solely for their own account, what’s known as proprietary trading. Banks do other kinds of trading that can also make them money, or loses it. Figuring out which trades fall into which category isn’t always easy, and deciding how much risk is too much for which kind of transaction may be even harder. On these issues, how regulators decide to enforce the rules may be as important as the rules themselves. Some regulators may be concerned only with seeing that the markets operate smoothly, other regulators may actually try to prevent banks from trading that would blow up the bank and possibly the global financial system.

The banks say there is no way to distinguish between proprietary trading and hedging and market making. Paul Volker, the former Chairman of the Federal Reserve, the guy the rule was named for; Volker says the distinctions aren't tough: “It's like pornography, you know it when you see it.”

Bottom line is that the banks are going to try to skirt the rules, and whittle them down a bit more before implementation, but if this fails, the logical next step is to make it real simple and reinstate the Glass-Steagall Act.

And here is why it will likely fail: the banks wrote the rules, it's all way too complicated, too big to fail is still a problem – only bigger, and nobody cares. Admit it, your eyes are starting to glaze over. Your concern is whether the ATM will spit out cash, will the bank process your payment to the electric utility, and maybe they can pass out a few mortgages from time to time. So, nobody will say much until the next credit freeze, or the next international crisis when everything goes to hell in a handbasket and the banks come begging for bailouts. When that happens, we can all shout bloody murder.

Don't worry. What could go wrong?

Right now, politicians are gathering in Washington to craft and pass a budget deal and avert another government shutdown, which could happen January 15, unless they can put together a deal. And it looks like they might be close to a deal to de-fuse this fiscal time bomb they set themselves.

Any tentative budget deal might allow spending to rise from the scheduled $967 billion for fiscal 2014 to around $1 trillion. While that increase in outlays would be offset by raising some government fees and possibly cutting federal workers' retirement benefits. The plan does not purport to be any "grand bargain" that would slash the federal deficit. They may have a deal in the next few days, but for right now, there is no deal.

GM is once again General Motors, and no longer Government Motors. The US Treasury sold its last shares yesterday. Bailouts from the Bush and Obama administrations helped GM avoid liquidation and instead reorganized in 2009 bankruptcy. In return, the Treasury became a shareholder in GM. The US said it lost about $10.5 billion on its investment of $49.5 billion, but that's not the entire story.

GM was returned to investment-grade status by Moody’s Investors Service in September after losing it eight years ago; it's back in the S&P 500 index (it had been kicked out back when it was facing bankruptcy). Share price is up over 40% year to date. They're making good cars that are winning awards. And they have a new CEO, Mary Barra, the first female CEO of an automotive company.

According to a study by the Center for Automotive Research, a total automobile-industry shutdown from a liquidation of GM and Chrysler would have cut 2.63 million jobs from the US economy in 2009.  The bailout saved or avoided the loss of $105 billion in transfer payments and the loss of personal and social insurance tax collection in 2009 and 2010.

Eight major technology companies have joined forces to call for tighter controls on government surveillance, issuing an open letter to President Obama arguing for reforms in the way the US snoops on people.

The companies said that while they sympathize with national security concerns, recent revelations make it clear that laws should be carefully tailored to balance them against individual rights. The letter reads in part: "The balance in many countries has tipped too far in favor of the state and away from the rights of the individual — rights that are enshrined in our Constitution... This undermines the freedoms we all cherish. It's time for a change."

The companies signing off on the letter include: AOL, Apple, Facebook, Google, LinkedIn, Microsoft, Twitter, and Yahoo. It sure would have been nice if the tech companies had been loudly supporting intelligence reform before Snowden's disclosures.

And today, more than 500 authors delivered a petition urging the United Nations to create an international bill of digital rights that would enshrine the protection of civil rights in the internet age. The signatories say the capacity of intelligence agencies to spy on millions of people's digital communications is turning everyone into potential suspects, with worrying implications for the way societies work.

The petition says the extent of surveillance revealed by Snowden has challenged and undermined the right of all humans to "remain unobserved and unmolested" in their thoughts, personal environments and communications. "This fundamental human right has been rendered null and void through abuse of technological developments by states and corporations for mass surveillance purposes."

The statement adds: "A person under surveillance is no longer free; a society under surveillance is no longer a democracy. To maintain any validity, our democratic rights must apply in virtual as in real space."

Demanding the right "for all people to determine to what extent their personal data may be legally collected, stored and processed", the writers call for a digital rights convention that states will sign up to and adhere to. "Surveillance is theft. This data is not public property, it belongs to us. When it is used to predict our behaviour, we are robbed of something else – the principle of free will crucial to democratic liberty."

Have you heard about the Doomsday File. Edward Snowden claims he didn't bring a single NSA document into Russia, but as journalist Glenn Greenwald has hinted, he may have access to a trove of pilfered documents stored on a data cloud. British and US intelligence officials tell Reuters they think he may have a "doomsday" cache containing highly classified material to ensure he won't be arrested or physically harmed. He's believed to have enough data to keep the bombshell reports coming for the next two years. It's unclear if intelligence agencies know where the data is stored, but somehow they're aware that at least three people have the passwords, which are only valid at certain times each day.

Of course today also the memorial service for Nelson Mandela. More than 100 current and former heads of state plus tens of thousands of others, attended the service at a soccer stadium in Soweto. Jacob Zuma, the current president of South Africa was booed. President Obama shook hands with Cuban President Raul Castro. It was a peculiar service, rambling and punctuated by high winds and a harsh rain. I think the best quote of the day goes to President Obama, who said: "Nelson Mandela reminds us that it always seems impossible until it is done." And while there were many dignitaries, it was a day for the people, not the powerful.